Bohatch v. Butler & Binion.

977 S.W.2d 543.
Supreme Court of Texas, 1998.

Partnerships exist by the agreement of the partners; partners have no duty to remain partners. The issue in this case is whether we should create an exception to this rule by holding that a partnership has a duty not to expel a partner for reporting suspected overbilling by another partner. The trial court rendered judgment for Colette Bohatch on her breach of fiduciary duty claim against Butler & Binion and several of its partners (collectively, "the firm"). The court of appeals held that there was no evidence that the firm breached a fiduciary duty and reversed the trial court's tort judgment; however, the court of appeals found evidence of a breach of the partnership agreement and rendered judgment for Bohatch on this ground. We affirm the court of appeals' judgment.

I. FACTS

Bohatch became an associate in the Washington, D.C., office of Butler & Binion in 1986 after working for several years as Deputy Assistant General Counsel at the Federal Energy Regulatory Commission. John McDonald, the managing partner of the office, and Richard Powers, a partner, were the only other attorneys in the Washington office. The office did work for Pennzoil almost exclusively.

Bohatch was made partner in February 1990. She then began receiving internal firm reports showing the number of hours each attorney worked, billed, and collected. From her review of these reports, Bohatch became concerned that McDonald was overbilling Pennzoil and discussed the matter with Powers. Together they reviewed and copied portions of McDonald's time diary. Bohatch's review of McDonald's time entries increased her concern.

On July 15, 1990, Bohatch met with Louis Paine, the firm's managing partner, to report her concern that McDonald was overbilling Pennzoil. Paine said he would investigate. Later that day, Bohatch told Powers about her conversation with Paine.

The following day, McDonald met with Bohatch and informed her that Pennzoil was not satisfied with her work and wanted her work to be supervised. Bohatch testified that this was the first time she had ever heard criticism of her work for Pennzoil.

The next day, Bohatch repeated her concerns to Paine and to R. Hayden Burns and Marion E. McDaniel, two other members of the firm's management committee, in a telephone conversation. Over the next month, Paine and Burns investigated Bohatch's complaint. They reviewed the Pennzoil bills and supporting computer print-outs for those bills. They then discussed the allegations with Pennzoil in-house counsel John Chapman, the firm's primary contact with Pennzoil. Chapman, who had a long-standing relationship with McDonald, responded that Pennzoil was satisfied that the bills were reasonable.

In August, Paine met with Bohatch and told her that the firm's investigation revealed no basis for her contentions. He added that she should begin looking for other employment, but that the firm would continue to provide her a monthly draw, insurance coverage, office space, and a secretary. After this meeting, Bohatch received no further work assignments from the firm.

In January 1991, the firm denied Bohatch a year-end partnership distribution for 1990 and reduced her tentative distribution share for 1991 to zero. In June, the firm paid Bohatch her monthly draw and told her that this draw would be her last. Finally, in August, the firm gave Bohatch until November to vacate her office.

By September, Bohatch had found new employment. She filed this suit on October 18, 1991, and the firm voted formally to expel her from the partnership three days later, October 21, 1991.

The trial court granted partial summary judgment for the firm on Bohatch's wrongful discharge claim, and also on her breach of fiduciary duty and breach of the duty of good faith and fair dealing claims for any conduct occurring after October 21, 1991 (the date Bohatch was formally expelled from the firm). The trial court denied the firm's summary judgment motion on Bohatch's breach of fiduciary duty and breach of the duty of good faith and fair dealing claims for conduct occurring before October 21, 1991. The breach of fiduciary duty claim and a breach of contract claim were tried to a jury. The jury found that the firm breached the partnership agreement and its fiduciary duty. It awarded Bohatch $57,000 for past lost wages, $250,000 for past mental anguish, $4,000,000 total in punitive damages (this amount was apportioned against several defendants), and attorney's fees. The trial court rendered judgment for Bohatch in the amounts found by the jury, except it disallowed attorney's fees because the judgment was based in tort. After suggesting remittitur, which Bohatch accepted, the trial court reduced the punitive damages to around $237,000.

All parties appealed. The court of appeals held that the firm's only duty to Bohatch was not to expel her in bad faith. The court of appeals stated that "'bad faith' in this context means only that partners cannot expel another partner for self-gain." Finding no evidence that the firm expelled Bohatch for self-gain, the court concluded that Bohatch could not recover for breach of fiduciary duty. However, the court concluded that the firm breached the partnership agreement when it reduced Bohatch's tentative partnership distribution for 1991 to zero without notice, and when it terminated her draw three months before she left. The court concluded that Bohatch was entitled to recover $35,000 in lost earnings for 1991 but none for 1990, and no mental anguish damages. Accordingly, the court rendered judgment for Bohatch for $35,000 plus $225,000 in attorney's fees.

II. BREACH OF FIDUCIARY DUTY

We have long recognized as a matter of common law that "the relationship between . . . partners . . . is fiduciary in character, and imposes upon all the participants the obligation of loyalty to the joint concern and of the utmost good faith, fairness, and honesty in their dealings with each other with respect to matters pertaining to the enterprise." Fitz-Gerald v. Hull, 150 Tex. 39, 237 S.W.2d 256, 264 (Tex. 1951) (quotation omitted). Yet, partners have no obligation to remain partners; "at the heart of the partnership concept is the principle that partners may choose with whom they wish to be associated." Gelder Med. Group v. Webber, 41 N.Y.2d 680, 363 N.E.2d 573, 577, 394 N.Y.S.2d 867 (N.Y. 1977). The issue presented, one of first impression, is whether the fiduciary relationship between and among partners creates an exception to the at-will nature of partnerships; that is, in this case, whether it gives rise to a duty not to expel a partner who reports suspected overbilling by another partner.

At the outset, we note that no party questions that the obligations of lawyers licensed to practice in the District of Columbia -- including McDonald and Bohatch -- were prescribed by the District of Columbia Code of Professional Responsibility in effect in 1990, and that in all other respects Texas law applies. Further, neither statutory nor contract law principles answer the question of whether the firm owed Bohatch a duty not to expel her. The Texas Uniform Partnership Act, TEX. REV. CIV. STAT. ANN. art. 6701b, addresses expulsion of a partner only in the context of dissolution of the partnership. See id. 31, 38. In this case, as provided by the partnership agreement, Bohatch's expulsion did not dissolve the partnership. Additionally, the new Texas Revised Partnership Act, TEX. REV. CIV. STAT. ANN. art. 6701b-1.01 to -11.04, does not have retroactive effect and thus does not apply. See id. art. 6701b-11.03. Finally, the partnership agreement contemplates expulsion of a partner and prescribes procedures to be followed, but it does not specify or limit the grounds for expulsion. Thus, while Bohatch's claim that she was expelled in animproper way is governed by the partnership agreement, her claim that she was expelled for an improper reason is not. Therefore, we look to the common law to find the principles governing Bohatch's claim that the firm breached a duty when it expelled her.

...

The fiduciary duty that partners owe one another does not encompass a duty to remain partners or else answer in tort damages. Nonetheless, Bohatch and several distinguished legal scholars urge this Court to recognize that public policy requires a limited duty to remain partners -- i.e., a partnership must retain a whistleblower partner. They argue that such an extension of a partner's fiduciary duty is necessary because permitting a law firm to retaliate against a partner who in good faith reports suspected overbilling would discourage compliance with rules of professional conduct and thereby hurt clients.

While this argument is not without some force, we must reject it. A partnership exists solely because the partners choose to place personal confidence and trust in one another. Just as a partner can be expelled, without a breach of any common law duty, over disagreements about firm policy or to resolve some other "fundamental schism," a partner can be expelled for accusing another partner of overbilling without subjecting the partnership to tort damages. Such charges, whether true or not, may have a profound effect on the personal confidence and trust essential to the partner relationship. Once such charges are made, partners may find it impossible to continue to work together to their mutual benefit and the benefit of their clients.

We are sensitive to the concern expressed by the dissenting Justices that "retaliation against a partner who tries in good faith to correct or report perceived misconduct virtually assures that others will not take these appropriate steps in the future." However, the dissenting Justices do not explain how the trust relationship necessary both for the firm's existence and for representing clients can survive such serious accusations by one partner against another. The threat of tort liability for expulsion would tend to force partners to remain in untenable circumstance -- suspicious of and angry with each other -- to their own detriment and that of their clients whose matters are neglected by lawyers distracted with intra-firm frictions.

Although concurring in the Court's judgment, Justice Hecht criticizes the Court for failing to "address amici's concerns that failing to impose liability will discourage attorneys from reporting unethical conduct." To address the scholars' concerns, he proposes that a whistleblower be protected from expulsion, but only if the report, irrespective of being made in good faith, is proved to be correct. We fail to see how such an approach encourages compliance with ethical rules more than the approach we adopt today. Furthermore, the amici's position is that a reporting attorney must be in good faith, not that the attorney must be right. In short, Justice Hecht's approach ignores the question Bohatch presents, the amici write about, and the firm challenges -- whether a partnership violates a fiduciary duty when it expels a partner who in good faith reports suspected ethical violations. The concerns of the amici are best addressed by a rule that clearly demarcates an attorney's ethical duties and the parameters of tort liability, rather than redefining "whistleblower."

We emphasize that our refusal to create an exception to the at-will nature of partnerships in no way obviates the ethical duties of lawyers. Such duties sometimes necessitate difficult decisions, as when a lawyer suspects overbilling by a colleague. The fact that the ethical duty to report may create an irreparable schism between partners neither excuses failure to report nor transforms expulsion as a means of resolving that schism into a tort.

We hold that the firm did not owe Bohatch a duty not to expel her for reporting suspected overbilling by another partner.

III. BREACH OF THE PARTNERSHIP AGREEMENT

The court of appeals concluded that the firm breached the partnership agreement by reducing Bohatch's tentative distribution for 1991 to zero without the requisite notice. The firm contests this finding on the ground that the management committee had the right to set tentative and year-end bonuses. However, the partnership agreement guarantees a monthly draw of $7,500 per month regardless of the tentative distribution. Moreover, the firm's right to reduce the bonus was contingent upon providing proper notice to Bohatch. The firm does not dispute that it did not give Bohatch notice that the firm was reducing her tentative distribution. Accordingly, the court of appeals did not err in finding the firm liable for breach of the partnership agreement. Moreover, because Bohatch's damages sound in contract, and because she sought attorney's fees at trial under section 38.001(8) of the Texas Civil Practice and Remedies Code, we affirm the court of appeals' award of Bohatch's attorney's fees.

* * * * *

We affirm the court of appeals' judgment.


JUSTICE HECHT, concurring in the judgment.

The Court holds that partners in a law firm have no common-law liability for expelling one of their number for accusing another of unethical conduct. The dissent argues that partners in a law firm are liable for such conduct. Both views are unqualified; neither concedes or even considers whether "always" and "never" are separated by any distance. I think they must be. The Court's position is directly contrary to that of some of the leading scholars on the subject who have appeared here as amici curiae. The Court finds amici's arguments "not without some force", but rejects them completely. I do not believe amici's arguments can be rejected out of hand. The dissent, on the other hand, refuses even to acknowledge the serious impracticalities involved in maintaining the trust necessary between partners when one has accused another of unethical conduct. In the dissent's view, partners who would expel another for such accusations must simply either get over it or respond in damages. The dissent's view blinks reality.

The issue is not well developed; in fact, to our knowledge we are the first court to address it. It seems to me there must be some circumstances when expulsion for reporting an ethical violation is culpable and other circumstances when it is not. I have trouble justifying a 500-partner firm's expulsion of a partner for reporting overbilling of a client that saves the firm not only from ethical complaints but from liability to the client. But I cannot see how a five-partner firm can legitimately survive one partner's accusations that another is unethical. Between two such extreme examples I see a lot of ground.

This case does not force a choice between diametrically opposite views. Here, the report of unethical conduct, though made in good faith, was incorrect. That fact is significant to me because I think a law firm can always expel a partner for bad judgment, whether it relates to the representation of clients or the relationships with other partners, and whether it is in good faith. I would hold that Butler & Binion did not breach its fiduciary duty by expelling Colette Bohatch because she made a good-faith but nevertheless extremely serious charge against a senior partner that threatened the firm's relationship with an important client, her charge proved groundless, and her relationship with her partners was destroyed in the process. I cannot, however, extrapolate from this case, as the Court does, that no law firm can ever be liable for expelling a partner for reporting unethical conduct. Accordingly, I concur only in the Court's judgment.

...

The New York Court of Appeals -- the only high court to have addressed the topic -- has expressed hesitation in specifying whether and when expulsion of a partner breaches fiduciary duties. In Gelder, a surgeon, a certain Dr. Webber, was expelled from a medical partnership because his personal and professional conduct had become abrasive and objectionable to his partners. Dr. Webber's psychiatrist described him as "a perfectionist who was a 'rather idealistic sincere, direct, frank individual who quite possibly could be perceived at times as being somewhat blunt.'" The court held that expulsion in accordance with the partnership agreement was proper. The court added:

Assuming, not without question, that bad faith might limit the otherwise absolute language of the agreement, the record does not reveal bad faith. Embarrassing situations developed, affecting the physicians and their patients, as a result of Dr. Webber's conduct, however highly motivated his conduct might have been. It was as important, therefore, in the group's eyes, as anything affecting survival of the group that it be disassociated from the new member's conflict-producing conduct. Indeed, at the heart of the partnership concept is the principle that partners may choose with whom they wish to be associated.

Even if bad faith on the part of the remaining partners would nullify the right to expel one of their number, it does not follow that under an agreement permitting expulsion without cause the remaining partners have the burden of establishing good faith. To so require would nullify the right to expel without cause and frustrate the obvious intention of the agreement to avoid bitter and protracted litigation over the reason for the expulsion. Obviously, no expulsion would ever occur without some cause, fancied or real, but the agreement provision is addressed to avoiding the necessity of showing cause and litigating the issue. On the other hand, if an expelled partners [sic] were to allege and prove bad faith going to the essence, a different case would be presented. . . . In his affidavits Dr. Webber has not shown even a suggestion of evil, malevolent, or predatory purpose in the expulsion. Hence, he raises no triable issue on this score.

Gelder, 363 N.E.2d at 576-577 (emphasis added; citations omitted). The court did not suggest what it might consider "bad faith going to the essence" or an "evil, malevolent, or predatory purpose". See also Day v. Sidley & Austin, 394 F. Supp. 986, 992-94 (D.D.C. 1975) (holding that merger of two law firms resulting in demotion of the managing partner of one office and his consequent resignation was not a breach of fiduciary duty); but see also Beasley v. Cadwalader, Wickersham & Taft, slip op., No. 94-8646 AJ, 1996 WL 438777 (Fla. Cir. Ct. July 23, 1996) (reporting a trial court's $2.5 million award to a partner expelled from a law firm as part of an office closing and reduction in size, because the purpose of the expulsion was to generate greater profits for the remaining partners, in violation of their fiduciary duty).

...

But I am troubled by the arguments of the distinguished amici curiae that permitting a law firm to retaliate against a partner for reporting unethical behavior would discourage compliance with rules of conduct, hurt clients, and contravene public policy. Their arguments have force, but they do not explain how a relationship of trust necessary for both the existence of the firm and the representation of its clients can survive such serious accusations by one partner against another. The threat of liability for expulsion would tend to force partners to remain in untenable circumstances -- suspicious of and angry with each other -- to their own detriment and that of their clients whose matters are neglected by lawyers distracted with intra-firm frictions. If "at the heart of the partnership concept is the principle that partners may choose with whom they wish to be associated", Gelder, 363 N.E.2d at 577, surely partners are not obliged to continue to associate with someone who has accused one of them of unethical conduct.

This very difficult issue need not be finally resolved in this case. Bohatch did not report unethical conduct; she reported what she believed, presumably in good faith but nevertheless mistakenly, to be unethical conduct. At the time, the District of Columbia Code of Professional Responsibility provided that "[a] lawyer shall not . . . collect a[] . . . clearly excessive fee." D.C. Code of Prof'l. Resp. DR 2-106(A) (1990). Pennzoil's conclusion that Butler & Binion's fees were reasonable, reached after being made aware of Bohatch's concerns that McDonald's time was overstated, establishes that Butler & Binion did not collect excessive fees from Pennzoil. A fee that a client as sophisticated as Pennzoil considers reasonable is not clearly excessive simply because a lawyer believes it could have been less. Bohatch's argument that Pennzoil had other reasons not to complain of Butler & Binion's bills is simply beside the point. Whatever its motivations, Pennzoil found the bills reasonable, thereby establishing that McDonald had not overbilled in violation of ethical rules. Bohatch's argument that Pennzoil's assessment of the bills was prejudiced by Butler & Binion's misrepresentations about her is implausible. There is nothing to suggest that Pennzoil would have thought clearly excessive legal fees were reasonable simply because it did not like Bohatch.

Bohatch's real concern was not that fees to Pennzoil were excessive -- she had never even seen the bills and had no idea what the fees, or fee arrangements, were -- but that McDonald was misrepresenting the number of hours he worked. The District of Columbia Code of Professional Responsibility at the time also prohibited lawyers from engaging in "conduct involving dishonesty, fraud, deceit or misrepresentation." Id. DR 1-102(A)(4). But there is no evidence that McDonald actually engaged in such conduct. At most, Bohatch showed only that McDonald kept sloppy time records, not that he deceived his partners or clients. Neither his partners nor his major client accused McDonald of dishonesty, even after reviewing his bills and time records. Bohatch complains that Butler & Binion did not fully investigate McDonald's billing practices. Assuming Butler & Binion had some duty to investigate Bohatch's charges, it discharged that duty by determining that Pennzoil considered its bills reasonable. (The district court, as the court of appeals noted, excluded evidence that Paine and McDonald himself went so far as to report the charges against McDonald to the lawyer disciplinary authority, which exonerated him.)

Even if expulsion of a partner for reporting unethical conduct might be a breach of fiduciary duty, expulsion formistakenly reporting unethical conduct cannot be a breach of fiduciary duty. At the very least, a mistake so serious indicates a lack of judgment warranting expulsion. No one would argue that an attorney could not be expelled from a firm for a serious error in judgment about a client's affairs or even the firm's affairs. If Bohatch and McDonald had disagreed over what position to take in a particular case for Pennzoil, or over whether Butler & Binion should continue to operate its Washington office, the firm could have determined that she should be expelled for the health of the firm, even if Bohatch had acted in complete good faith. Reporting unethical conduct where none existed is no different. If, as in Gelder, a partner can be expelled for being blunt, surely a partner can be expelled for a serious error in judgment.

Butler & Binion's expulsion of Bohatch did not discourage ethical conduct; it discouraged errors of judgment, which ought to be discouraged. Butler & Binion did not violate its fiduciary duty to Bohatch.

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JUSTICE SPECTOR, joined by CHIEF JUSTICE PHILLIPS, dissenting.

What's the use you learning to do right when it's troublesome to do right and ain't no trouble to do wrong, and the wages is just the same?

-- The Adventures of Huckleberry Finn

The issue in this appeal is whether law partners violate a fiduciary duty by retaliating against one partner for questioning the billing practices of another partner. I would hold that partners violate their fiduciary duty to one another by punishing compliance with the Disciplinary Rules of Professional Conduct. Accordingly, I dissent.

...

The majority views the partnership relationship among lawyers as strictly business. I disagree. The practice of law is a profession first, then a business. Moreover, it is a self-regulated profession subject to the Rules promulgated by this Court.

As attorneys, we take an oath to "honestly demean [ourselves] in the practice of law; and . . . discharge [our] duty to [our] clients to the best of [our] ability." Tex. Gov't Code 82.037 (emphasis added). This oath of honesty and duty is not mere "self-adulatory bombast" but mandated by the Legislature. See Schware v. Board of Bar Exam'rs, 353 U.S. 232, 247, 77 S. Ct. 752, 1 L. Ed. 2d 796 (Frankfurter, J. concurring) (noting that the rhetoric used to describe the esteemed role of the legal profession has real meaning). As attorneys, we bear responsibilities to our clients and the bar itself that transcend ordinary business relationships.

...

The duty to prevent overbilling and other misconduct exists for the protection of the client. Even if a report turns out to be mistaken or a client ultimately consents to the behavior in question, as in this case, retaliation against a partner who tries in good faith to correct or report perceived misconduct virtually assures that others will not take these appropriate steps in the future. Although I agree with the majority that partners have a right not to continue a partnership with someone against their will, they may still be liable for damages directly resulting from terminating that relationship.

The Court's writing in this case sends an inappropriate signal to lawyers and to the public that the rules of professional responsibility are subordinate to a law firm's other interests. Under the majority opinion's vision for the legal profession, the wages would not even be the same for "doing right"; they diminish considerably and leave an attorney who acts ethically and in good faith without recourse. Accordingly, I respectfully dissent.